RaboResearch - Economic Research

Country Report India

Country Report


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The recent massive election win of Modi’s Bharatiya Janata Party and expectations of business friendly reforms are boosting sentiment and growth. However, India will not change overnight. 

Strengths (+) and weaknesses (-)

(+) Positive demographic characteristics

India will enjoy the benefits of a growing working age population. This should boost economic growth in the years ahead.

(+) Large and diversified economy

India has a large, diversified economy, which limits its vulnerability to external shocks. While the agricultural sector is the main employer, the services sector accounts for about two-thirds of GDP.

(-) Infrastructural bottlenecks and difficult business environment

Infrastructural bottlenecks are estimated to reduce GDP growth by one to two percentage points per year. Businesses also face hurdles in the form of red tape, corruption and state intervention.

(-) Political environment hampers reform process

The federal structure of India complicates decision making and policy implementation while the political environment remains fragmented, even after the BJP securing a majority in the Lok Sabha. 

Key developments

1. Modi’s Bharatiya Janata Party secures a massive election win

The Bharatiya Janata Party (BJP) led by Narendra Modi convincingly won the 2014 general elections (held in April and May 2014) and secured a majority in India’s lower house of parliament (the Lok Sabha). The last time one party obtained a majority in the Lok Sabha was some 30 years ago. The victory was partly due to the immense popularity of BJP leader Narendra Modi and a desire for economic reforms among the Indian people, amid a weak economic environment in the years before the elections. In addition to being held responsible for the weak economy, the popularity of the ruling Congress party (INC) was hurt by a series of corruption scandals. As a result, the BJP secured 282 of the 543 seats in the Lok Sabha, an increase of 166 seats compared to the 2009 elections. The National Democratic Alliance (NDA), in which the BJP is the largest party, now has 336 seats. The INC lost 162 seats and now has 44 seats in the Lok Sabha and its United Progressive Alliance has 60 seats.

2. A window of opportunity for reforms

With the BJP having a majority in the Lok Sabha, a window of opportunity has opened to implement reforms. The reform progress in India should speed up as a result, although hurdles remain in place. In the past decades, India’s reform process was notoriously slow, which has undermined the country’s structural growth potential. Now that the BJP no longer has to rely on coalition partners to pass reforms in the lower house of parliament, the government can start to make work of needed reforms. Firstly, business friendly reforms are needed to revive investment growth, which has been below 1% a year since 2012. Tax reforms and reducing FDI restrictions are prime candidates in this regard. Other reforms that would be very welcome are labor law reforms, reforms that streamline the slow bureaucratic process, land reforms and reforms of the agricultural sector. The government will also have to raise investment in infrastructure, as India’s inadequate infrastructure is named as the most problematic factor for doing business in India[1]. India, of course, will not change overnight. First of all, the BJP is likely to take an incremental approach to the reform process, while the BJP has also shown a somewhat nationalistic tendency in recent decisions. An international WTO agreement was blocked to protect India’s agricultural subsidy program and legislation to raise the FDI cap in the insurance sector came with strong conditions. Secondly, the BJP still faces political hurdles. The now-opposition INC and its UPA coalition have the majority in the upper house of parliament (the Raiya Sabha), at least until 2016, which could frustrate the reform process. Furthermore, many badly needed reforms, such as land and agricultural, land and labor reforms (partly) fall under the responsibility of state governments. Such state level reforms will be more difficult to achieve, as the BJP’s NDA coalition is in power in only 9 of India’s 29 states.

3. The mood has turned

Sentiment towards India have turned from negative to positive in the past 12 months, which is having a positive impact on growth. In 2013, India was seen as one of the countries most vulnerable to the impact of tapering by the US Federal Reserve. The country’s weak economic performance since 2012, rising inflation and current account and fiscal deficits (twin deficits) meant that risk aversion towards India increased steeply last year. However, sentiment has recovered strongly since. The currency made up part of the lost ground and stock markets in India have reached record-highs. The appointment of Raghuram Rajan – a respected economist - as governor of India’s central bank in September 2013 and the subsequent implementation of pro-active monetary policies provided a first boost to sentiment. The (anticipation of a) BJP win in the elections and the expectation of business-friendly policies in the coming years provided a second important boost. The improved sentiment was an important driver of the recent surprisingly positive growth figures. Most striking was the strong rise of investment growth, from near zero to 7% y-o-y in April-June (the first quarter of FY2014-15) and overall growth accelerated to 5.7% y-o-y. It was the strongest growth since late 2011. Fiscal consolidation – the Modi government has recently set ambitious budgetary targets – and expected weak growth in the agricultural sector due to relatively poor monsoon rains will likely subdue growth in the coming quarters. Even so, growth is expected to continue to edge upward in the coming two years, to roughly 6% this year (perhaps somewhat higher) and around 6.5% in 2015. External sentiment may, however, turn sour once again, which presents an important downside risk. India still hasn’t addressed its sizeable twin deficits – the current account deficit is estimated at around 3% of GDP in 2014 and 2015, the budget deficit at roughly 5% of GDP, although the intended fiscal consolidation may result in a somewhat smaller budget deficit - and India may therefore once again appear on investors’ risk radar. The resulting depreciation of the rupee and falling FDI inflows would undermine growth, albeit only to a certain extend.

Figure 1: The mood has turned
Figure 1: The mood has turnedSource: Reuters EcoWin
Figure 2: Growth continues to trend upwards
Figure 2: Growth continues to trend upwardsSource: Ministry of Statistics India, World Bank, Rabobank
Factsheet of India
Factsheet of IndiaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

India is a large and extremely diverse country with huge regional differences, a huge gap between rich and poor, and very diverse economic sectors. Per capita income was about USD 1,500 in 2013 (roughly USD 5,500 in PPP terms). India’s Planning Commission reported that in 2011-2012, 25.7% of the rural population and 13.7% of the urban population lived below the national poverty lines (which are lower than the World Bank’s standard of USD 1.25 per day). Although India is still home to more undernourished and poor people than all of sub–Saharan Africa, progress on poverty reduction has been impressive when India’s rapid population growth is taken into account. India will benefit from a growing working-age population in the coming decades. This could be a catalyst for growth but also a source of social unrest. The agricultural sector is very important to the rural community. Although it only produces 18% of GDP, about two-thirds of the population depends on this sector for its livelihood. At the other end of the spectrum there is the world-class IT sector that is a major driver of the services sector. India has a federal structure and many subjects have been delegated to state governments. At the central level, the Bharatiya Janata Party (BJP) secured a majority in the lower house of parliament in the recent election. It was the first time in three decades that one party managed to do this. This should bode well for progress on reforms, as India’s fragmented political scene has been an important impediment to reforms in the past. However, as the BJP lacks a majority in the upper house of parliament and many areas that need to be reformed fall under the jurisdiction of regional governments, obstacles to reform remain. There is frequent social unrest and occasional communal violence in some parts of India, often in areas that have a strong tribal presence or experience religious and ethnic tensions.

Economic indicators of India
Economic indicators of IndiaSource: EIU


[1] World Economic Forum, Global Competitiveness Index 2013-2014


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